The real estate investment landscape requires a deep understanding of various terminologies and concepts and one term that frequently comes up, especially in wholesaling, is the "assignment fee."
This concept plays a critical role in the wholesaling transaction process and can significantly influence the profitability of deals.
To fully grasp its impact and effectively utilize it as a part of your real estate investing strategy, it's important to delve deeper into the nature of assignment fees and their role in real estate wholesaling. We’ll do just that in this blog, so keep reading!
An assignment contract in real estate is essentially an agreement that allows one party (the assignor) to transfer or assign the rights and obligations of a property purchase agreement to another party (the assignee). Contract assignments are typically used by real estate investors who have very little money or those who don't want to buy properties and put in an earnest money deposit.
To be more detailed, the property owner and the assignor (usually a real estate investor or wholesaler) enter into a purchase agreement. This real estate contract states that the assignor agrees to buy the property for a specific price within a certain time frame. The real estate contract details all the terms and conditions of the sale.
The assignor then decides they don't want to or cannot complete the purchase themselves. Instead, they find another interested party (the assignee) who wants to purchase the property.
The assignor enters into an assignment contract with the assignee. This real estate assignment contract effectively transfers all rights and obligations of the initial purchase agreement from the assignor to the assignee.
Once the assignment contract is signed, the assignee steps into the shoes of the assignor. They are now the ones who will buy the property, adhering to the terms and conditions of the original purchase agreement. The assignee will complete the purchase with the original property owner.
The assignment fee is the difference between the price the real estate wholesaler contracted with the original seller and the price the end buyers or cash buyers agree to pay. This fee is essentially the wholesaler's compensation for their role in finding the property, securing the real estate assignment contract, and linking the seller with a willing cash buyer.
For instance, if the real estate wholesaler got a property under a real estate assignment contract for $100,000 and found an end buyer willing to pay $120,000, the $20,000 difference would be the real estate assignment fee during the closing date. This is the wholesaler's profit for effectively linking up the seller and the buyer.
The average assignment fee for a real estate wholesaler can vary widely based on several factors, including the real estate market they're operating in, the specific property, and the details of the deal.
It's not uncommon to see assignment fees range anywhere from a few thousand dollars to $20,000 or even higher. Some wholesalers aim for a standard assignment fee, like $5,000 or $10,000 per deal, while others may aim to make a certain percentage of the property's price which may realistically cost 10 to 20%.
A significant factor that impacts the assignment fee is the potential profit in the deal. If a property is significantly undervalued and there's a large margin for profit on the closing date, the assignment fee could be higher. Similarly, if the deal is less profitable, the assignment fee might be on the lower end.
As the real estate market can fluctuate and change rapidly, always consult with a real estate professional or legal expert for the most current and accurate information.
The average assignment fee for a lot, much like with a house or other types of real estate, can vary greatly based on numerous factors such as the location of the lot, its size, the demand in the area, zoning restrictions, and more.
There isn't a universally applicable average fee due to the wide array of factors at play. However, wholesalers might aim to earn a certain percentage of the lot's price as their assignment fee, typically somewhere around 10 to 20%, but it can go higher or lower depending on the specifics of the deal.
For example, in an area where vacant lots are in high demand for new construction, the assignment fee could be substantial. Conversely, in an area with lower demand or restrictive zoning, the assignment fee might be lower. This may also vary if you are double closing.
In a real estate wholesaling transaction, the assignment fee is typically paid by the end buyer or assignee. This is because the assignment fee represents the wholesaler's profit for facilitating the deal, identifying the property, securing the original contract, and then assigning that real estate contract to the cash buyer.
The cash buyer pays the wholesaler the agreed-upon assignment fee, often at the closing date, in addition to the real estate purchase price that the wholesaler originally negotiated with the seller. The wholesaler makes their profit from the assignment fee, while the seller receives the originally agreed price. This may be a little different when double closing.
The calculation of an assignment fee in real estate wholesaling is fairly straightforward. The assignment fee in an assignment of contract is typically the difference between the price that the wholesaler has agreed to pay the property seller and the price that the end buyer agrees to pay for the property.
Remember, while this is a common way to calculate assignment fees on real estate contracts, there can be variations based on the specific deal and local laws and regulations.
Assignment fees in real estate wholesaling are generally taxable. They are considered income for the wholesaler and are subject to tax laws just like any other form of income.
When a wholesaler earns an assignment fee in an assignment of contract, this fee is essentially the profit they make from facilitating the real estate transaction. Therefore, it's considered as part of their taxable income for the year in which the fee was earned.
The specific tax rate can vary depending on several factors in an assignment of contract, including the total amount of income the wholesaler earns in a year, their filing status, and more. Additionally, the tax treatment can vary if the wholesaler operates as an individual or through a business entity, like an LLC or a corporation.
As always, tax laws can be complex and they can vary from place to place, so it's essential to consult with a tax professional or tax advisor to understand the implications and obligations in your specific situation.
It's crucial to keep accurate records of all real estate transactions or assignment of contract, including the earning of assignment fees and double close deals, to ensure you're prepared when it's time to file taxes.
The HUD-1 Settlement Statement, often simply referred to as the HUD (implemented by the Department of Housing and Urban Development), is a standardized form that outlines the final details of a real estate transaction, including closing costs.
It itemizes all charges imposed on both the cash buyer and the seller and provides a full accounting of the transaction when flipping real estate contracts.
The assignment fee could show up on the HUD-1 Settlement Statement, but its placement would depend on the specific circumstances of the transaction.
In some cases, wholesalers prefer to keep the assignment fee off the HUD-1 to maintain privacy about their earnings from the transaction. Instead, they might use a separate assignment agreement with the end buyer or cash buyer that outlines the fee in the assignment contracts.
However, some transactions — especially those involving certain types of financing such as double close or those subject to specific local laws or regulations — may require all fees to be documented on the HUD-1. In such cases, the assignment fee might be listed as a line item on the form.
In many cases, real estate agents are not typically involved in assignment fees because such fees are often associated with wholesaling transactions or assignment contracts, a practice that most agents don't engage in as they are representing sellers or cash buyers in a more traditional sales process.
However, it's technically possible for a real estate agent to earn an assignment fee if they're also operating as a wholesaler or are involved in a wholesale transaction, but there are some important things to consider.
First, the agent must fully disclose their intentions to all involved parties. If they have a property under contract and intend to assign that contract for a fee, they must let the seller, buyer, and any other relevant parties know about this.
Second, the agent should confirm that this practice is allowed under their brokerage's policies. Some brokerages may not allow their agents to engage in wholesaling or similar activities.
Lastly, the agent needs to ensure they're adhering to all local and national laws in an assignment of contract. This can vary greatly, so it's crucial to consult with a legal expert or a real estate attorney or closing attorney to ensure everything is being done legally and all contractual obligations are performed.
There are many strategies you can use to increase assignment fees in an assignment of contract, but they can vary in effectiveness based on your local market, real estate laws, and personal real estate investing strategy.
To help you start earning larger assignment fees, check out the following tips:
Double closing, also known as "simultaneous closing" in assignment contracts, involves two separate transactions that are linked at the same time. The wholesaler first purchases the property from the seller and then immediately sells it to the buyer.
By doing double closings, the wholesaler can often increase their assignment fee because the end buyer does not see the original real estate purchase or asking price, which allows the wholesaler to mark up the property's price more significantly.
If you don't want to do double closing, maybe the 75% rule will work for you. The 75% rule is a guideline that suggests that an investor should pay no more than 75% of the after repair value (ARV) of a property minus the repairs needed. Sticking to this rule in assignment contracts can ensure that the property is purchased at a price that allows room for a profitable assignment fee.
A strong negotiation can significantly increase assignment fees real estate. Wholesalers must be skilled in negotiating a lower price with the seller and a higher price with the buyer in the assignment of contract. This requires confidence, a good understanding of property values, and a knack for sales and communication.
Cash buyers are often willing to pay more for the convenience of a quick close, which can result in a higher assignment fee. Establishing a strong network of reliable cash buyers who are looking for investment opportunities can be very profitable for a wholesaler.
This refers to setting a ceiling on the original purchase price that still allows for a profitable assignment fee. By calculating the max allowable offer (MAO), wholesalers can ensure they never overpay for a property and that there's always room for their assignment fee.
An unmotivated seller is unlikely to agree to a price that leaves room for a good assignment fee. Wholesalers should focus their time and energy on sellers who are motivated to sell quickly and willing to negotiate on price.
Networking and learning from other successful wholesalers can provide valuable insights. Other wholesalers might share successful strategies, potential pitfalls to avoid, or even refer deals if they have too many.
The 80/20 rule, or the Pareto Principle, states that 80% of effects come from 20% of causes. In wholesaling, this could mean that 80% of profits come from 20% of deals.
Identifying and focusing on the types of deals in assignment contracts that generate the most profit can help increase overall real estate assignment fees.
Now that you already understand what an assignment fee is, it’s time to start wholesaling real estate. To guide you, here are the detailed steps.
Before embarking on any real estate venture, it's vital to understand the rules and regulations that govern the practice.
This includes both local and national laws relating to wholesaling. Be aware of the legalities involved in assigning contracts, necessary disclosures, and any license requirements in your area.
The next step involves seeking out properties that are not listed on the market—these are often referred to as off-market properties.
These can be properties in need of repair, owned by motivated sellers, or those foreclosed upon property or real estate owned. Uncovering the property address of these opportunities often requires diligent research and networking.
Assess the property's After Repair Value (ARV). This is an estimate of what the property could be worth after paying for the repair costs.
This is a crucial step in determining whether the deal could be profitable and how much you should offer for the property. The typical repair cost can be expensive so you should really look into this before signing the sale agreement.
Once you've identified a promising property, the next step is to reach out to the seller to offer an assignment of contract. This could be through a direct mail campaign, a phone call, or even a door-to-door visit. The goal is to discuss their interest in selling the property for a contract assignment.
This involves investigating the property in detail. You'd want to look at the physical condition of the property, any title issues by contacting the title company, and any other factors that could affect the property's value or scalability before you get ready for a sales agreement and get the property sold. This process is often referred to as "due diligence."
If the property passes your due diligence and the owner is willing to sell, the next step is to put the property under contract. This agreement for the property obtained should allow you to assign the contract to another buyer (unless local laws prohibit this).
Now that you've secured the contract, you need to find an end buyer. This is often a real estate investor looking for a new project. You'll want to have a robust buyer's list that you can reach out to when you have a property available.
Once you have a willing buyer, you'll assign them the rights to the purchase contract. This involves another contract, known as the assignment contract, in which you officially transfer your rights as the buyer to the new buyer.
After the assignment contracts reassigned and the new buyer purchases the property from the seller in the closing table, you can get the assignment fee paid.
This is your profit for facilitating the deal, and it's usually the difference between the price you contracted with the seller and the price the buyer agreed to pay for the original contract in case you do not double close.
Understanding the concept of an assignment fee in assignment contracts is crucial for anyone involved in real estate wholesaling. As discussed in this blog, an assignment fee is essentially the profit a wholesaler makes for facilitating a property transaction.
Various factors can influence the amount of this fee, such as the property's potential value, market demand, and the negotiation skills of the wholesaler.
If you feel like you are ready for your first wholesale deal, then check us out at Property Leads. We offer highly motivated seller leads perfect for wholesaling! We sell these leads exclusively to cut your competition.
Fill out our form below to start getting wholesaling leads and earning assignment fees.
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Sheridan, WY 82801
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